APEX CAPEX

How is govt capital expenditure driving India's growth? Will RBI's suggested provisioning affect it?

- INDIVJAL DHASMANA

The International Monetary Fund (IMF) recently attributed India's robust economic growth to strong public investments supported by a resilient domestic demand.

Pacific Krishna Srinivasan, Director of the Asia and Department, International Monetary Fund said in a blog post: "...India, where public investment remains an important driver, making it the world's fastest-growing major economy." But there are layers to this.

The government capital expenditure (capex), both of the Centre and states, steadily rose in recent years, aggregating more than Rs 10 trillion since 2021-22 (FY22). It is projected to rise to ₹19.07 trillion (revised estimates of the Centre and budget estimates of the states) during FY24, 34 per cent higher than the previous year. This comprised 6.5 per cent of the country's gross domestic product (GDP) during FY24 against 5.3 per cent in the previous year and 5.6 per cent in FY22.

Govt capex drives growth Most of this capex push, particularly the Centre's, has gone to infrastructure, mainly to railways, and roads and highways.

The two accounted for more than 45 per cent of the Centre's capex since FY21 and more than 40 per cent since FY20, when the economy started slowing down with lockdowns being announced at the fag end of the year.

Madan Sabnavis, Chief Economist at Bank of Baroda, says governments have a role to play in infrastructure, where the private sector normally plays a secondary role. "Our government has been focussing on roads and railways for this reason," he says.

Ranen Banerjee, Partner at PwC India, believes the economic growth is being pump primed by government expenditure, which is needed. The government can afford it, given the high tax buoyancy. The government capex is skewed towards roads and railways because these are two sectors that are able to absorb the allocations, he says.